James Findlay, chief executive of Findlay Park and manager of the group's US Smaller Companies fund,...
James Findlay, chief executive of Findlay Park and manager of the group's US Smaller Companies fund, believes deflation was more of a problem in the US two years ago than it is today.
Speaking at a forum organised by Jupiter Asset Management, Findlay said while Fed chairman Alan Greenspan has focused on deflation in the past month, this is an out-of-date concern. From here on in, Findlay expects a slow and steady recovery in the US economy.
He said: 'Two years ago, there was a lot of new capital being thrown at the market. In the tech, media and telecom areas in particular, a lot of new competition was being created for the old economy companies, which made it difficult for the whole market to move ahead.'
Today, Findlay noted, US companies have cut costs and the market is beginning to see some nominal growth come through in first quarter sales, which he believes will continue into the second quarter.
However, he expects the recovery to be less robust than in the past as there is not the driving force of consumer demand behind it, so companies do not have the same spending power.
In an environment in which the population is growing 1%-2% per year and 10-year bonds are yielding only 3.4%, he said, it is hard to imagine the US economy will not recover.
The deflationary environment the US experience two years ago was very different to anything experienced in the past 20-30 years, according to Findlay.
As inflation was not getting out of control in a booming economy it meant there were a number of different factors at work, so interest rates could go down quickly.
He said: 'In a typical cycle, you get interest rates going up fast for the first 12-18 months, which puts a dampener on the housing market and consumer demand. Then, as inflation comes under control, you begin to get pent-up consumer demand coming back into the economy, driving corporate profits and meaning corporations can spend more.'
The latest cycle, however, is out of sync with this as rates dropped sharply early on in the downturn, Findlay noted. While this has not helped the economy, he said, given the enormous boom witnessed in the late 1990s, there has not been a lot of consumer demand as it has come down much less than it did in previous downturns.
Findlay set up Findlay Park and launched the US Smaller Companies fund five years ago, after previously managing the F&C Smaller Companies fund from 1988 to 1998.
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